Advanced Micro Devices: Upgrade to Buy, $15Pt – Sterne

Advanced Micro Devices (NYSE:AMD) is getting a major bump from Sterne Agee this morning with the firm upgrading the name to Buy from Neutral with a Street high price target of $15.

– Sterne believes AMD has been on a streak of market share losses in the PC-server market culminating with the recent loss of the AMD CEO. They believe that should mark a cyclical fundamental bottom in market share.

Potential NB-Server Share gains: AMD has been on a long 4- year streak of market share loss to Intel (INTC – $21.46 – Buy) with Intel’s successful launch of Nehalem Xeon Servers and SandyBridge platforms. The 8-year chart (below) shows AMD’s Notebook (NB) market share at 12-14% and Server Market Share at 5% both now at historical cyclical bottoms, especially in front of the launch of Llano-Bulldozer products. While AMD was expected to launch its Bulldozer-Llano late in 2010, AMD has lagged with delays. Sterne believes that AMD should be able to introduce its Bulldozer and Llano platform in C2Q11 which will imply some share gains by YE2011, potentially with much better NB-Server gross margins closer to 50-65%. The last Opteron Server Upside cycle was a full 3 years upside for AMD.

– Sterne believes the last successful NB platform launch in 2003-04 propelled AMD to 19-20% market share. AMD’s next platform Llano, now in 2011, should hit the OEMs- ODMs in C2Q11

Server Market Share at Cyclical Lows:
They believe AMD’s Server market is now at historical lows. When AMD last introduced its Opteron Server in 2003-04, it led to a 3-year cycle of market share gains, with associated multiple and market share expansion. However, in 2006 Intel launched its Nehalem Xeon Architecture leading to AMD’s share decline. Now we are on the next generation as AMD gets ready to launch its next Generation Bulldozer Server platform. A 5% Server market share gain at a 65% margin adds approximately $500M and $0.20 in EPS to AMD.

CEO Exit: While AMD’s CEO exit created a management vacuum in the middle of a product transition, the firm believes the installation of a new CEO over the next couple of months should be another positive catalyst.

Sterne believes AMD saw the perfect storm with 1) INTC SandyBridge Launch, 2) Delays with Llano, 3) Server Share loss, and 4) Top Management Moves. They therefore believe this should mark a bottom, and any improvement in any of the areas above should be upside.

Estimates and Valuations: They believe given AMD management comments and potential NBServer share gain, AMD can do 48-49% GMs by C2012. Also assuming a 5% Market share gain to AMD is an incremental $600M in revenues. AMD in 2006-2007 at 10-15% Server market share was trading at 53-57% GMs. Firm is raising their C11E from prior $6.65B/$0.29 to $6.7B/$0.37 and their C12E from $6.8B/$0.45 to $7.3B/$0.95. Their $15 PT on AMD is about 16x their C2012 EPS of $0.95. AMD has traded between 10x and 40x forward P/E in the last 10 years.

Notablecalls: AMD is on the run, I suspect. The run started on Jan 3 when Citigroup added the name to their Top Picks Live list with a a then Street high tgt of 12.50 causing the stock to go up a quick 15%.

It was interrupted by the CEO resignation a week later. The stock retraced all of its recent gains & dim sum.